3rd February 2010
Although the UK officially came out of recession last week the
hangover from the impact of unemployment, the high level of
personal debt, and the prospect of rising interest rates will drive
an increase in the number of people taking out a debt management
plan in 2010, according to moneysupermarket.com's debt expert.
For most people a fee charging debt management plan is a last
resort and consumers should explore do-it-yourself solutions and
debt guidance from organisations such as the Citizens Advice Bureau
and CCCS. However, with many organisations struggling to cope
with the rising tide of people with problem debt, waiting times can
be long. As a result many customers opt for a fee charging
debt management company which can offer the prospect instant
relief.
With around 20,000 people signing up to debt management plans
every month, for those who can no longer control and service their
debts, a debt management company could be the right solution;
however moneysupermarket.com warns about the many potential
pitfalls in the unregulated minefield of the debt management
industry.
Tim Moss, head of loans and debt at
moneysupermarket.com, said; "Being in debt and watching
red letters fall through your letter box can be an extremely
stressful experience, and many people find that hiring a debt
management company to negotiate with their creditors for them can
bring a real sense of relief. We can expect to see around 30 per
cent more applications for debt management plans this year and
consumers have to be very careful when dipping their toe into this
world, as it currently exists outside the realm of government
regulation.
"It can be extremely hard to differentiate between debt
management companies as they are not compelled to publish their fee
structures or standard practices. Unlike comparing savings rates or
credit card APR's there is no openly published way to discern
between good and bad providers. moneysupermarket.com lists only
DEMSA OFT Approved Code firms which means you can be confident
these companies will treat you fairly, but you should still make
sure you fully understand how they are going to charge you before
entering into an agreement.
"One of the key things customers should check is how many
monthly payments will be taken as an up front fee before creditors
receive any money. This is vital because the more months that pass
without creditors being paid off, the worse your credit record
becomes. We have heard of horrific cases where of up to six
payments are taken in charges before a creditor is paid, this means
you will have paid lots of money to the debt manager before they
have cleared a single penny of your debt.
"If you are going to use a debt management company you should
only do so with your eyes wide open. Not being fully aware of all
the charges involved could make a bad financial situation much much
worse."
moneysupermarket's debt management checklist:
First of all, be sure that you need a debt management
company, look carefully at your budget and try to see if
you can renegotiate debt repayments directly with your
creditors.
When hiring a debt management company, make sure they
are members of DEMSA. DEMSA members are accredited to an
"OFT Approved Code" of conduct, by using a DEMSA accredited debt
manager you can be sure of receiving a fair service -
moneysupermarket.com lists only DEMSA accredited debt managers.
Ask what fee structure the debt manager
charges. Typically a debt management agreement can have
four different charges. Firstly you'll be charged an arrangement
fee. Secondly the debt manager will take a number of your agreed
monthly payments before paying off any creditors; this could be as
many as six payments for the most unethical debt management firms.
Thirdly debt managers charge a percentage fee for each monthly
payment they take; this is usually between 15 and 18 percent. The
final potential charge is that some debt management companies have
been known to take payments from remaining available credit in
their customer's finances - customers should avoid this at all
costs.
Claims Financial